More Evidence that Rising Student Debt is Bad for Lenders

New York Fed President William Dudley said that any increase in delinquencies among student borrowers would diminish their creditworthiness  and their ability to qualify for home loans in the future.

Students who took out big loans to attend college or graduate school have lower rates of homeownership than those with little or no educational debt, according to research published Monday.

The report from the Federal Reserve Bank of New York found that the homeownership rate for 33-year-old college graduates who with no student debt is over 45%, or about 5 percentage points higher than peers who have debt burdens of over $20,000. Borrowers who took out even larger loans — over $100,000 — to pay for professional degrees, for instance, are also repaying their loans more slowly, as they take advantage of income-based repayment plans.

The findings come as student debt continues to skyrocket, as borrowers take out more in loans to fund the rising cost of tuition. They also confirm a lingering worry for the banking industry: More prime-age, college-educated borrowers are delaying the decision to take out their first mortgage as they focus instead on paying off their student loans.

“One can imagine that that the housing market might be less buoyant, fewer people would own homes, and that would have some consequences for bank balance sheets,” New York Fed President William Dudley said during a press briefing Monday.

He added any increase delinquencies among student borrowers would diminish their creditworthiness and their future ability to qualify for home loans.

Over the past decade, student loan balances have spiked, even as consumers paid down other types of credit, such as mortgages and credit cards. Overall student loan debt reached $1.3 trillion at the end of 2016, an increase of 170% from a decade earlier.

After rising to around 3.5% in 2011, student-loan defaults have since stabilized around 3%, as more borrowers have taken advantage of income-based repayment programs. Still, there are other signs of credit trouble ahead, as defaults among borrowers with more than $100,000 in loans have risen sharply.

While such high loan balances used to be confined to graduate students in professional programs, such as medical school, that’s not the case anymore, said Donghoon Lee, an officer in the research and statistics group at the New York Fed.

“It’s not so uncommon to borrow more than $100,000 in debt, without necessarily getting a professional degree,” Lee said during the briefing.

During his presentation, Dudley said he does not expect banks’ mortgage lending to suffer too much in the short term, given the large role that the government plays in encouraging homeownership.

However, he said the surge in student debt is a drag on the overall economy because consumers burdened by high debt are buying fewer goods and services.

“I think [student debt] is one reason why the economy has been slower than maybe we thought it would be over the last few years,” Dudley said.

It’s unclear what, exactly, policymakers can or should do to address the rising debt burden. Colleges could provide students with more information about their postgraduation salaries and outcomes, to help them make more informed decisions, Dudley said. He also said that schools should do a better job of consulting with the business community, to make sure they are providing the right kind of training for open jobs in the market.

At one point during the briefing, Dudley sounded open to a debate over making public college education free — an idea floated by both Democratic candidates, Hillary Clinton and Bernie Sanders, during the presidential campaign.

“As the economy gets more complicated, and as knowledge becomes more important, in terms of future outcome, that’s a reasonable conversation to have,” Dudley said.

At various points during the briefing, Dudley and other Fed economists pointed to the diminished role of higher education in providing low-income students a pathway to economic mobility.

Still, data continues to show that obtaining college degree is associated with better economic outcomes later in life, regardless of students’ debt loads. For instance, four-year college graduates are still far more likely to be homeowners than those who obtained an associate’s degree, or didn’t attend college at all.

“The message here is not ‘Don’t go to school, don’t take out student debt,’ ” Dudley said. “The message here is go to school, and finish school, and even if you have student debt you’ll be in better shape than if you didn’t go to school."

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